Obama's student loan profit machine

In his current term, the government may earn more than $110 billion from this program, more than the country's most lucrative companies.

By Aimee Picchi May 16, 2013 2:53PM

College diploma (© Corbis)The federal government will turn a tidy profit -- to the tune of more than $110 billion -- from student loans during President Barack Obama's current term, thanks to a form of arbitrage that's helping the government reap more in earnings than some of the country's most lucrative companies. 

What's driving the government's profits from lending to students? It's the fact that while the Federal Reserve is maintaining rock-bottom interest rates, students are obligated to repay their loans at a rate that's three times as high. The Treasury, as the middleman, gets to keep the difference. 

That will allow the government to book profits of about $35 billion in the current fiscal year from its loans to college graduates, according to estimates from the Congressional Budget Office. 

On top of that figure, the agency on Tuesday said a credit adjustment will add an extra $15 billion in profit, partly because older loans had been more profitable than earlier forecast, given the Fed's continuing low rates. On paper, that means the government will profit by about $50 billion this year. 

And it means the government's student loan program is more profitable than some of the country's most lucrative businesses, from Apple (AAPL), which posted a $41.7 billion profit last year, to Exxon (XOM), which had $44.9 billion in profit last year, as the Huffington Post points out.

The student loan program is expected to report several extremely profitable years to come, too. Until Obama leaves office, the government is forecast to reap more than $110 billion in profits from lending money to college students, according to the CBO's estimates. 

What's interesting is that the money machine isn't expected to go on at these levels forever. Because the Fed is likely to raise rates as the economy stabilizes, the CBO projects that profits will shrink each year through 2023. By that point, the government may realize only $6 billion in student loan profits per year, give or take. 

The moneymaking machine may lend support to Sen. Elizabeth Warren, D-Mass., and her argument that students should pay the same ultralow interest rate the Fed charges to banks, as reported Monday

College grads currently pay 3.4% on federally subsidized Stafford loans, a rate that Congress set more than a decade ago, when rates were much higher than today's. The Federal Reserve discount rate is just 0.75%. 

But with total student debt of more than $1 trillion, many people in their 20s and 30s are struggling to pay off their student loans while also pursuing dreams such as buying a home.

Follow Aimee Picchi on Twitter at @aimeepicchi

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May 16, 2013 3:40PM
" It's the fact that while the Federal Reserve is maintaining rock-bottom interest rates, students are obligated to repay their loans at a rate that's three times as high". Last time I checked the feds rate is 0.25% while student loans are around 5-7% so more like 20-30 times as high
May 16, 2013 3:53PM
No wonder Obama is pushing student loans - just another way to squeeze more money out of the middle class. And when they graduate, they'll be lucky to find a minimum wage job....
May 16, 2013 4:07PM
I'm a 'mature' student pursuing a medical degree, and unsubsidized Stafford loans are at 6.875%, with interest accruing while in school.  There are private loans available with variable rates of 2-3%, but with the anticipated rate rises approaching, variable rates seem like a poor option.  My hubby works his butt off in a well compensated field, so we've decided to live simply and pay out of pocket for my education (after putting 15% of net income in investments for retirement of course), but most of my peers, especially the straight from undergrad students, don't have this level of financial support.  They will graduate with 250k+ in student loans on top of any loans from their undergrad, and who knows where the healthcare field will be at that point, or the long term implications of the Affordable Care Act.  Residencies are competitive and most pay relatively low wages, and it takes time to build a successful private practice. Our country is facing enormous shortages in the number of primary care physicians.  Perhaps this approach to funding their education should be reevaluated. 

It seems to me, that an educated nation is a stronger nation, and that these escalating costs are an enormous deterrent to seeking that education. 
May 16, 2013 3:43PM
You're stooping to a new low here, Aimee.  A gov program is "profitable"?  Give me a break.  As a member of the 53% that actually pay income taxes, when can I expect my "profit sharing" check?
May 16, 2013 4:07PM

I don't mind.  Without student loans I wouldn't have been able to get the education I have, and eventually the job that I have.  And before anyone yells about saving and being responsible, let me tell you that I worked nonstop throughout my school years.  I held two jobs in the summers and even took a year off from school scrimpting and saving every penny I could while working 12-13 hour days.  I lived in a hole-in-the-wall my family members still tease me about and became friendly with ramen noodles and cereal.  Despite all that, I still wouldn't have been able to do it as I graduated with a $59K loan. 


 However, considering that my undergrad and law school tuition was close to $150K in total (without including living expenses),I think I did pretty well.

May 16, 2013 3:34PM

I pay 6% on my loans with sallie mae, it does seem excessive when  I can get a used car loan for 2-3%.


Though it's not hard to pay each month, I got a real degree (B.S.), not a lib arts degree.

May 16, 2013 4:34PM

So where is all this extra money going?  I think I know.  It will be going to support all the new entitlement programs that can be dreamt up by our government representative that have made a living out of so called government service. 


All of my family members paid our loans off as agreed, why can we not collect the dollars that people owe for there education costs?  I think I know why, we have incompetent people running the program, and there is no accountability to those that hired them. 


I think it is great if there is really a profit.  But I would sure keep and eye on where the money goes.   

May 16, 2013 8:21PM
The article didn't mention how many students are defaulting on their loans, and if that wipes out any profits.
May 16, 2013 7:42PM
This is a sterile debate - there is no institution on the planet that will loan tens of thousands of dollars to someone with no income, no assets, no history and no prospects other than "maybe" a degree and  a good job afterwards.

The programs isn't gouging students - take a look at the rates charged to soldiers, to "payday loan" customers, to people with jobs and a good credit record for an unsecured loan - far more than 6%, much less the  highly favorable rates on student loans.  The taxpayer guarantees these loans, and a return of 4 to 5% on a trillion dollar-plus portfolio is far from gouging.

Warren is a pandering socialist that has no place in the debate - she's a bleeding heart freshman senator from a marginal state with large mouth and addled brain.
May 17, 2013 1:36AM
Student loans are the next housing bubble...like a trillion dollar bubble - many are already in default
May 16, 2013 9:06PM
After you count the loans that are in default are you sure we are making any profit at all?
May 17, 2013 4:31AM
Student Loan Facts: If you fail to pay.

1)The Government can Garnish your Wages.
2)Not Paying can destroy your Credit Rating and potential employers can hold it against you.
3)It's not discharged in Bankruptcy.

It's not Obama's profit Machine, it's Congress's profit machine, they determine the rates, not Obama. The GOP want rates UP and the Democrats want rates DOWN.

May 17, 2013 1:34AM
This only works if the Students ACTUALLY pay their loans back...
May 17, 2013 7:41AM
Has nothing to do with Obo. But I'm sure he will make up some lie to make it look good for him.
May 16, 2013 4:15PM
This is just a shell game...... they take the money from one pocket (tax payer) and put it in the other pocket (slug)....... Much like when Regal Man services Sgt Frank or Limo Pat.
May 16, 2013 4:17PM
Last year, the GOP in the Senate voted to block freezing student loans as rates were set to double back in 2012.  Eventually the GOP caved in to Public Pressure.

Now in 2013, on July 1, rates are set to again Double. The  GOP wants them to go up, Dem want's them stay down. Where do you think the political fallout will go this time around if rates go up. Exactly.

May 17, 2013 7:42AM
Typical Obama rip-off. When will this man and his Chicago bums just go-away?
May 17, 2013 8:28AM
The government shouldn't be trying to reduce the deficit on the backs of our students, but then we continue to hear words and see actions that aren't consistent.
May 17, 2013 8:09AM

Obama campaigned about how important education is and how he was going to help them

and that how his Republican counter part didn't care about them and these fools belived him


May 17, 2013 11:34AM

Take it to the Supreme Court then they can re-write and call it a tax.


I am so sick of this government gouging We the People.   Bad enough they have saddled our future generations with a near $17 trillion debt and growing but that wasn't enough damage to do to them. They decided to targeted vulnerable kids and use them to profit off of. They took over student loans so they could put a noose around their necks.  They demonized the banks, steal their customers and pocket the money for themselves. 


Wake up people!  : |  

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